Serbia: Public debt to GDP threshold breached
Overview:
For some time the Serbian government has been assuring investors that it will not indulge in a pre-election spending boom, offering the IMF program and its new fiscal rules as a framework to ensure macroeconomic stability. However, not only has the IMF agreement gone off track but public debt breached its 45% of GDP threshold at the end of 2011. Whether debt is slightly below or above the threshold is less important than whether it serves as a policy anchor for the government to change its ways. There is little sign of this so far. The situation is certainly not easy. Growth will be close to zero this year. However, a large fiscal overshoot and further increase in the debt ratio will unsettle investors. It may be only the prospect of a credit rating downgrade and associated higher borrowing costs that will discipline the government.